Halifax credit card customers will feel base rate hike

By Helen Fowler

Experts are questioning a decision by
Halifax to tie its credit card interest rates to the Bank of England base rate
on the eve of an anticipated rise in that rate. The base rate is
what the central bank charges other banks for secured overnight lending.

Despite Halifax's previous insistence that the
base rate does not affect its credit card rates, it's now reversed that
rhetoric and alerted cardholders by letter that it will pass any rise in the
base rate on to them in full from 13 February. The move has provoked
accusations of opportunism.

"You do have to question the timing
because rates are only going to go one way," says Andrew Hagger, of MoneyComms.
"The card provider is going to benefit."

Rates on Halifax cards vary from 12.9% to
19.95%, while the Bank of England rate has remained
at 0.5% since March 2009, a historic low unmatched in 300 years.

Growing speculation suggests official rates
may be set to rise. The Halifax letter coincides with growing optimism over the
UK economy that could lead Bank of England governor Mark Carney to hike rates. The
unemployment rate for October to December 2013 stands at 7.4%, according to Office
of National Statistics data, down by 0.3 percentage points from the
previous quarter.

As part of the Bank's "forward
guidance" policy, Carney has said he will not raise the base rate from
0.5% until unemployment drops to 7%. With the UK's economic recovery strengthening,
observers suggest that the country may reach that level of employment sooner
than expected.

"Card providers used to say there
wasn't a direct link [between their charges and Bank of England rates]," says
Hagger. "Now, they do seem to have
changed tack and done a U-turn. And it's at a time that suits them. This is
taking the biscuit a little, when there's only one winner."

"Base rate is at an extraordinarily
low level not previously seen in 300 years, and there is criticism that the
average credit card APR (as calculated by the Bank of England) has recently
been edging upwards," says the UK Cards Association.

The Halifax move is ironic, given that card
providers have previously insisted that the base rate doesn't affect their
rates as much as you might think.

"At points where the base rate has
moved down, providers have put out releases saying they do not get any benefit
from falling rates," said Hagger.

Credit card companies maintain they could
not lower their APRs when base rates fell about five years ago because they face
a number of running costs that do not exist with other forms of lending, such
as mortgages or personal loans.

According to the UK Cards Association, the
cost of borrowing money to finance cardholders' balances generally accounts for
only a proportion of credit card issuers' costs. Other costs such as
authorising and processing transactions, posting out statements, issuing cards,
handling customer queries, preventing and covering the cost of fraud losses, swallowing
bad debts, and delivering innovation (such as chip & PIN or contactless
card payments) may be rising while base rates are falling, it says.

A
spokesperson for Halifax declined to say how many customers would be affected
by its decision to pass on base rates changes as soon as they come into force.
Numbers are thought to run into several millions.